Dollar Falls to Record Low Over Fannie and Freddie

The US dollar fell to a record low against the Euro as traders around the world grow increasingly worried about the health of Fannie Mae (FNM), Freddie Mac (FRE) and the overall US banking sector.

(Source: My Technical Analyst Jamie Saettele at DailyFX.com)

The collapse in the dollar Tuesday is entirely due to risk aversion and flight to safety because gold prices are also above $980 oil prices and oil prices are above $146 a barrel.

Monday, the rise in the VIX (to a 3 month high) already indicated that the markets are nervous and are not buying into Paulson’s proposal for a larger credit line and an equity investment. They know that this is not the answer to current problems in the financial markets especially since the troubles have reached beyond Fannie Mae and Freddie Mac.

When banks like Washington Mutual (WM) coming on the wires reassuring investors and depositors that they are well capitalized - it is clear that they are worried about the same lines of depositors demanding a withdrawal as IndyMac.

Everyone believes that the Fed is running out of magic bullets and this is exactly the time when the markets need a dazzling surprise from the Fed.

At the end of the day, the US government will come up with something.

Retail sales Weakest Since Feb

Unfortunately retail sales were also weak. It rose 0.1 last month compared to the market’s 0.4 percent forecast. Excluding spending at gas stations, retail sales actually dropped 0.5 percent. Consumers cut back on spending for motor vehicles, food and electronics and furniture. Discretionary spending has really been hurt by higher gasoline prices and a weak labor market.

Producer Prices Grow by Fastest Pace Since 1981

Producer prices were mixed with headline figures rising more than expected but core prices falling short of expectations. This drove the annualized pace of PPI growth hit the highest level since 1981.

And thus we have the Fed’s problems - strong inflationary pressures in the face of weak consumer spending and a falling stock market.

Bernanke - Please Give us a Rate Cut!

Forget about a rate hike this year and let’s start talking about cutting interest rates once again. It is time for Bernanke to shift his focus back to growth and supporting the financial markets. Cutting rates will of course come with the risk of even higher oil prices, so it may be unrealistic.

Instead, they will probably opt for more creative measures such as offering Fannie and Freddie access to emergency financing.

Keep an eye on Bernanke’s testimony on the Economy and Monetary Policy at 10 am because MAYBE he will have some tricks in his bag.

Comments

[Ishortyou:]

Well it looks like things are not getting better, so the government has no choice but to launch an aggressive plan to bump up the demand in the housing market to reduce inventories, either that or we all are going down to the dark ages.

2008 Jul 15 10:26 AM

[Asia Hand:]

I

2008 Jul 15 10:31 AM

[Asia Hand:]

Who has the balls to tell this little twerp to get lost?

Her calls change on a daily basis and she has zero experience.

I consider her a contraindicator.

Get lost kid and when you get a couple of notches on your belt give us a call.

Like maybe.

Or you can jump of the tallest building in sight and do us all a favor.

2008 Jul 15 10:36 AM

[Melancholy ...:]

"Her calls change on a daily basis and she has zero experience."

Can't speak about her experience, but it's clear you don't have any.

Are you someone (not a trader, clearly) who has to be right about the market every day? Even better, you ARE right about the market every day, right? Why so bitter, then? Been buying FNM on the dips 'cause you just know it's a great company? Married to that long dollar position?

2008 Jul 15 11:27 AM

[friend:]

USA is losing severely in a financial attack .

It is true that there is the subprime problem .

Short sellers pull down financials would only fuel the vicious cycle that spiral the economy from bad to worst .

Sure , the short sellers are strong and concerted .

All financials could go down more than 5% or even 10% in one or two hours time .

The concerted strength can only be released by some conspired power .

Such conspiracy is a crime .

As well , it certainly would successfully push a panic button to the general investors who may only want a quiet life when retired from long years of work .

Cutting the equity of bank stock by pulling down their prices would of course put the bank in a credit crunch .

The short sellers are fed in expense of the bank's equity .

The only way to savage this economy is to buy against the short sellers so that the financial equity or pricing can be raised to a reasonable level .

Fannie / Freddie ( FNM / FRE ) are the stocks of most strategic importance .

Should a strong defender step in to buy against the short seller so that the pricing can be maintained at a reasonable level .

The whole financial market would be at the start to be stablized .

FNM / FRE would need the equity or reasonable pricing in order to facilitate the passing of the mortgage rescue law .

The mortgage rescue plan would effectively stablize the housing market on a permenant basis .

I knew for the fact that some government encountered a similar financial cresis with the short sellers .

The same government buy against the short seller to maintain a reasonable price level , by using a trust funds being set up with the taxpayers' money .

The trust funds then owned a pile of the stock purchased from the open market without diluting the corporation at issue .

The stock price then grow back to normal and the trust funds made huge money for the taxpayers .

The short sellers lost a huge chunk of money and disappeared .

The bad news used by the short sellers disappeared as well .

Can the bulk of people , general investors and public inclusive , win this financial war against a small group but organized short sellers ?

2008 Jul 15 11:31 AM

[Asia Hand:]

"Her calls change on a daily basis and she has zero experience."

Can't speak about her experience, but it's clear you don't have any.

"Actually I have experience. My experience (or your accusation of lack thereof) is not the problem. I just don't think she (you?) knows how to make calls; that's it. Her calls suck and everybody knows that. I certainly wouldn't want her managing my mother and father's assets."

Are you someone (not a trader, clearly) who has to be right about the market every day? Even better, you ARE right about the market every day, right? Why so bitter, then? Been buying FNM on the dips 'cause you just know it's a great company? Married to that long dollar position?

"I am not sure what to say about that. I buy when I buy and I sell when I sell. I am not per se a trader you got that call right. Well I try. I try my best. But I know a black horse from a white horse, I can tell you that."

Seeking Alpha has credibility, I don't want this to turn into a crying game. I have learned a lot here sans this particular author who is of little use.

2008 Jul 15 11:58 AM

[Coelacanth:]

dadodge2,

If you knew anything about trading you'd know that if you practice strict money management you only need to be right about 45% - 60% of the time to be a successful. Ever stop to consider Ms. Lien may be disciplined in calculating her risk to reward ratios? Probably not.....because you're too busy judging. Is she right on every call? Of course not....none of us are.
______________________...

Crazy price action last night......it was telling that despite the awful German ZEW current sentiment read that the euro barely skipped a beat this morning. Oil backing off and Legarde (French Finance Minister) stating on the wires that "the euro is too high" this morning seemed to help USD a bit. IMO if (and that's a big if) EUR/USD can close around 1.5900 - 15910 that might signal a reversal pattern (for dadodge2......."revers... in trader speak doesn't mean it will start going the other direction....it means the current trend may be stalling or ending).

We'll see......I still think the euro is overvalued and experiencing its last bit of strength against other majors before euro-zone weakness comes into sharper focus.

2008 Jul 15 01:23 PM

[ardano:]

To my fellow seekers.

Some of KL's observations are accurate and some data points valid. However, sometimes the logic that jumps from a series of observations to a trade/strategy is dubious. Current markets are perhaps the most challening ever. I have commented on articles talking about recent statements by Jamie Dimon where he says that the complexities of the markets are difficult for him to deal with. He's the head of JPM, and he's confused? I agree that posters need to be careful with their logic strings, but that as readers we should also be as postive as possible to advance accurate information as we seek alpha.

2008 Jul 15 02:15 PM

[Jason Rines...:]

One fast weigh in on this drama and personal attacks. STOP IT. If nothing else this writer demonstrates daily factual data. I disagree with her assements about the remedy for this economy on interest rates but there are two camps and each bring valuable input into something few of us have lived through before.

I really only want to comment on Friend's point: The real issue is that poor management still resides at these companies. Federal government will no doubt be taking over many of these entities, firing management, pouring through millions of transactions, on the books and off. This process will take years and the lawsuits will be flying.

The American public probably won't buy into a trust fund of direct government holdings of real-estate. Americans are not overseas. Many became part-time traders with online services these last 10 years. Selling the idea to put lipstick on this pig of bad excuses for government and corporate mismanagement won't work. If there is a silver lining for taxpayers assuming this risk fine. But attempting to sell it as a value proposition to the public already happened, remember? That what Freddie and Fannie were already.

Banking as a whole will be federeralized, gutted, shareholder value erased and the taxpayer stuck with the risk and continued taxation in the form of inflation to pay the increased debt servicing. We all lose, expect the handfuls of the most corrupt and indept running the funny farm who have either exited already or have there 'Get Out Of Jail Free' cards with a golden parachute attached.

When Washington has it's head up it's ass, and it has for the last 15 years since Clinton and Bush Sr. talked about there grand global new world order vision (it was 40 years too early, let the Information Age do it's job).

The dumb masses from this mess will figure it out and become a new Greatest Generation in 20 years just like the self-centered speakeasy crowd become by 1946 when they entered the Great Depression.

Heavy lifting by many innocents that were slaughtered at the alter of the few will not be easily forgotten by the time this one is over either.

But we will fare better then the 1930's as long as we avoid attempting to be the world's policemen and ensuring overseas nations they didn't just buy big bags of monopoly money. That means selling them what they want and Washington must get out of the way on this point and let the free market get to work.

2008 Jul 15 03:13 PM

[Asia Hand:]

It is quite clear we are in difficult (for some) times of monumental proportions.

I wish you all the best of luck in this difficult (and for the few, profitable) situation.

Ad hominems are misplaced anxiety about this situation.

As I wrote, a black horse and a white horse are different.

Time to sleep here in China.

Best.

2008 Jul 16 01:01 AM